Question

ACC 707 Auditing and Assurance Services Individual Assignment Question 1 While assessing the risk of material misstatement and determining the appropriate response with regard to the inventory of Advanced Computer Solutions Limited (Advanced Computer Solutions) for the 30 June 2018 audit, you become aware of the following information: (i) The best-selling computer presentation package has been experiencing a high level of returns owing to suspected software problems (ii) Based on closing inventory, inventory turned over an average of 5.4 times in 2017 and 3.8 times in 2018 (iii) Advanced Computer Solutions moved its inventory from a central warehouse to six new regional warehouses in March 2018 (iv) Inventory on hand at end of year represented 26 per cent of sales in 2018 and 18 per cent of sales in 2017 (v) Advanced Computer Solutions has recently won a tender to supply a large government department with various products. In order to win the tender and prevent competitors from gaining a foothold in the public sector market, Computing Solutions agreed to supply the items at 10 per cent below their cost price. The first shipment is due to be delivered to the government department in the middle of July 2018. REQUIRED (a) Identify and explain the two key assertions at risk in relation to inventory (b) Identify and describe two substantive audit procedures that you could perform in response to each risk identified above (c) Explain the requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report and the rationale for this auditing standard. Determine if the above matters are key audit matters, providing full rationale for the determination. If it is determined that they are Key Audit Matters, provide the disclosures which are required in Key Audit Matters Section of the Auditor’s report as required under ASA 701.

Answer 1

The two key assertions with respect to inventory are:

1. Valuation of inventory as the turnover of the inventory is declining and thus it may be the case that the NRV is lower than cost.

2. The existence of inventory will also be a key assertion due to transfer to inventory.

Substantive procedure:

I will try to trace the net realizable value for the inventory and will physically inspect the inventory.

Requirement of ASA 701:

The auditor shall determine, from the matters communicated with those charged with governance, those matters that required significant auditor attention in performing the audit. In making this determination, the auditor shall take into account the following:

Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with ASA 315

Significant auditor judgements relating to areas in the financial report that involved significant management judgement, including accounting estimates that have been identified as having high estimation uncertainty.

The effect on the audit of significant events or transactions that occurred during the period.

The auditor shall determine which of the matters determined in accordance with paragraph 9 of this Auditing Standard were of most significance in the audit of the financial report of the current period and therefore are the key audit matters.

The above matter will be considered as a Key audit matter as the turnover of the inventory is reducing. Further, in order to get the tender, it has reduced the sale price even below cost which has a negative impact on the revenue and the margins of the company.